Suppose that a treatment involves costs and benefits, but also uncertainty. That is, costs are expected costs...
Suppose that a treatment involves costs and benefits, but also uncertainty. That is, costs are expected costs and benefits are expected benefits. Expected costs = 1,000 and expected benefits = 900.
A. How would someone who is risk neutral feel about this treatment?
B. Would a risk lover always approve or disapprove of this treatment? Why or why not?
C. Would someone who is risk averse always approve or disapprove of this treatment? Why or why not?
Homework Answers
A. A risk neutral person would ask for more information, since his main concern is maximising profit and not avoiding or attracting risk.
B. A risk lover would jump on this opportunity since expected cost and benefit are both really high, which will increase the risk and hence a risk lover's attraction towards this choice. Therefore, he would approve.
C. A risk averse would disapprove of this treatment since the expected cost is really high.
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